When a business is profitable, it can provide a high standard of living for its owners and provide steady employment for its workers. If a business is not profitable or at least bringing in consistent revenue, it can be difficult for that organization to stay in existence. Therefore, it is important for a company to manage its money properly. What are some common financial traps that a business should do its best to avoid?
1) Expanding Too Rapidly
Companies who see success in their early days may think that the market will support additional locations. However, this means additional operating expenses, additional marketing expenses and the risk of eroding the brand through the dilution of company culture. Therefore, a business needs to make sure that there is enough money to be made to justify expansion before it occurs.
2) Not Charging Enough for Its Goods or Services
Startup business owners may understand how to make a product or deliver a service. However, they may not know how much to charge for that good or service. While giving away products for free or at a discount is a great way to drum up business at first, it may not allow much room for future profits needed to grow the company.
3) Taking on Too Many Outside Investors
Selling equity in a company is a great way to raise money quickly. The problem is that there is only so much equity to go around before the original owner or owners lose control of their business. Instead of following your own dreams and vision, you are beholden to those who often value profits over your company culture.
4) Hiring Employees Too Early in the Growth Process
One of the great things about owning your own business is that you can eventually hire other people to perform the tasks that you either don't want to do or aren't as good at doing. Unfortunately, it costs money to hire people to work for your company. If there isn't enough revenue coming in to justify hiring more workers, it could jeopardize the company's finances. Therefore, it is critical to examine the total cost of hiring a worker, which may include benefits, sick time and bonuses.
5) Staying in America When Production Costs May be Lower Overseas
The ability to claim that a product is Made in America may be a source of pride to a business owner. However, the cost of making a product is generally less expensive overseas. In some cases, the difference between making a product in America and making it overseas can be the difference between a business surviving or going out of business.
Although a business can project the potential risks and benefits of a financial decision, it is often hard to determine whether something was a success or failure until it actually happens. Fortunately, there are certain money traps that a company can avoid by planning ahead and determining what its needs will be both now and in the future. While not every decision works like it was anticipated to, a good business owner will give him or herself the flexibility to ensure that one failure doesn't lead to more.